Think Twice

I commonly see situations where individuals decide to loan money. For example, many would rather borrow from an individual in order to pay off higher interest loan or because of poor credit. While it is much faster in the short term to shake hands on the agreement or maybe even write a quick notation on a handy piece of paper, one should think twice about lending money. Borrowing or loaning money is a risky and complicated process, especially if it is between friends or family. This is and should be a treated like a real business transaction. The parties must be clear on whether the money is a gift or a loan. If interest on the loan will be a part of the agreement then the interest must be lawful under the Texas Finance Code, which itself is very complicated. And beware – if an interest rate is not set then the IRS may do it for you. There should be an agreement on a repayment schedule and whether any collateral will secure the loan. The parties should put the entire agreement into written form in case the agreement must be enforced later on. This also establishes an expectation that the loan is to actually be repaid. These basic terms should merely form the skeleton of the promise to repay. Any fleshing out of the terms may need to be reviewed by a professional. Also, one should think twice about how the loan will affect the family members. It is good to keep in mind that you will likely be sitting across the dinner table from that person at the next holiday.

First of all I will state that borrowing money is a dangerous concept because a borrower may one day suddenly find his or herself out of work and unable to repay the loan. Certainly, we live in a culture of consumerism that constantly bombards us with the message that we should buy more stuff. Many families, corporations, and even certain states now face the inability to repay on the money borrowed to buy that stuff. And many of them have little or no savings in reserve to stay afloat in a sea of that debt. However, borrowing is sometimes necessary and it can be done responsibly and with a budget in place. Yes, a written budget is needed so that income can be balanced against expenses in order to show how much money is left over at the end. Unfortunately, responsible money management is, shall we say, not as widely broadcast by our culture as the spending of money is. And if you are on the lending end of the transaction, it is advisable to make sure you protect your investment by speaking with a professional about the profits and pitfalls involved.